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Hey Mike,
I was having a little confusion regarding the impairment review of goodwill under the partial (proportionate) goodwill method. The goodwill that we use under the proportionate method for the goodwill review is the GROSSED UP goodwill, this term is confusing me as we include a notional for NCI unrecognised goodwill with the goodwill attributable to the parent. Why is this adjustment for ?
Also, the method we use for the calculation of goodwill under the proportionate goodwill method is the goodwill attributable to the parent or it includes the goodwill unrecognised element to NCI too ?
Or, the above situation only applies when we r given goodwill attributable to parent separately and not given details to calculate goodwill through partial method ? e.t net assets of sub at acq’n.
Thanks.When the nci investment is calculated on a proportional basis, there is no goodwill attributable to the nci.
So any impairment is entirely attributable to the parent.
Even when we sell part of the subsidiary to the nci, because they have no goodwill on acquisition, we don’t sell any of our goodwill to them.
So, when reducing our investment in a subsidiary from 80% down to 60%, we are NOT selling any goodwill to them.
Is that better?
Hello Mike,
Any chance helping me with this sentence: “It can be calculated (though not done in this example) that of Savannah’s recognized goodwill (before the impairment) of $5m only $500,000 (ie 10%)..” Can you help with showing the calculation of this amount?
(from SA technical article here https://www.accaglobal.com/content/dam/acca/global/PDF-students/2012/sa_jul10_F7_IFRS3.pdf):
The sentence appears in this paragraph is below:
“…FURTHER ISSUES
The original question contained an impairment of goodwill; let’s say that this is $1m. IAS 36 (as amended by IFRS 3)
requires a goodwill impairment of a subsidiary (if a cash generating unit) to be allocated between the parent
and the non-controlling interests in on the same basis as the subsidiary’s profits and losses are allocated. Thus,
of the impairment of $1m, $750,000 would be allocated to the parent (and debited to group retained earnings
reducing them to $29.55m ($30,300,000 – $750,000)) and $250,000 would be allocated to the non-controlling interests,
writing it down to $3.65m ($3,900,000 – $250,000). It could be argued that this requirement represents
an anomaly. It can be calculated (though not done in this example) that of Savannah’s recognised goodwill
(before the impairment) of $5m only $500,000 (ie 10%) [ ] relates to the non-controlling interests, but the NCI suffers
25% (its proportionate shareholding in Savannah) of the goodwill impairment.Steve Scott is examiner for Paper F7”
Hmm – this is the way I used to calculate goodwill with 2 columns in W2. Us and Nci
If you allocate the FV of SNA @ DOA to the two columns, you could well find that the nci has only minimal goodwill and that, when we start impairing it and allocating on the basis of shareholdings, the nci share of goodwill is rather more dramatically reduced than is the parent’s share
But this two column approach is not the format which the examiner is looking for so I don’t really wish to make up an example to illustrate because …. well, because it’s not the format he wants!
So why on Earth he’s decided to write it and highlight it in an article actually leaves me very confused.
If you insist, I’ll make up an example to illustrate the inequity of the treatment of the nci …. but only if you insist
Thank you Mike!
I will not insist as I managed to locate the same article but in 2008 SA issue by the same author, which actually shows the calculation of this 10%. Here is the link if anybody is interested.
https://content.ll-0.com/accastudent/sa_aug08_scott.pdf
The only question I have thus far, is it useful to discern between NCI goodwill and parent goodwill when using proportionate method of consolidation (just like shown in the working ii of the Example 3 in the linked pdf)? Or is this example just explains this ‘anomaly’, where, say 25% NCI (by net asset share), has 10% goodwill (when calculated proportionately), but still suffers 25% goodwill impairment? And there is no use to split the goodwill this way for the exam?
Hi
I don’t know the article but …. where proportionate method is used, there is no goodwill attributable to the nci.
I imagine the article is there to explain the anomaly
I illustrate it by showing the students the gross unfairness when the directors value nci on a “fair value” basis at $1 greater than their proportional share.
From a director’s point of view… “Why not?”
From an nci point of view … “Whoa, wait a minute!”
Thank you!
Does it really matter how a parent values the NCI for NCI’s own accounting?
I suppose NCI will value their non-controlling interest share in subsidiary at cost (or IFRS 9) in their books and be done with it, whatever the parent values NCI in parent’s own books, no?
The nci could well be hundreds of thousands of different individuals – people like you and me. Nci is simply a name given to an aggregation of other people who hold the shares in a company which are not owned by the main investor – the parent
i have the same question.what is unrecognised goodwill? can u please help me in question no 1 of december 2011 p2 exam.please have a look in the impairment working i tried so much but im not getting it that why 30 was added in total of netassets and goodwill.
I just get really confused – in some questions they use the total equity figure as net assets and then adjust for FV adjustments. In other questions they use either the total assets or liabilities figure and then adjust for FV adjustments (this is for the carrying amount of assets before adding the goodwill amount).
Please advise urgently
When looking to see whether there is an impairment, we need to consider the full value of the subsidiary Captive. We know that our goodwill attributable to our 80% holding is 120. Therefore, if we had valued the nci on a full fair value basis, their goodwill would have been 20/80 of that ie 30
That total, 150, together with the carrying value of the net assets gives us 770 and the question tells us that the recoverable amount is 700 so there’s an impairment of 76 and our share of that is 80%.
That’s what “unrecognised goodwill” is – it’s a notional addition to arrive at the full value of the subsidiary
If, instead, you had taken our goodwill of 120, added 80% of the carrying value of the net assets (80% x 626 = 500.8) giving us 620.8 and compared that with 80% of the recoverable amount (80% x 700) 560, you would have arrived at the same impairment of 60.8
OK?
Hi Mike,
I reopen this question coz I hope I could find the answer myself to save your time when I practice example 3 from Chapter 3 more complex group structures on page 22. I found the impairment on goodwill is recognized for NCI – W4, NCI in D, goodwill share of impairment: 160, NCI in V, goodwill share of impairment 383.
However, for Trailer – June 2013, the working 3 of impairment of goodwill, the answer says: as the goodwill relating to the NCI is not recognized, no impairment of goodwill is allocated to the NIC.
Could you please have a look? Which instruction I should follow?
Thanks,
Qin
What it is saying is that we should calculate notional goodwill, calculate the impairment, but then charge only our share of the impairment. Where the nci is valued on a proportional basis, no goodwill relating to them is recognised. But in calculating whether the investment is impaired, we need to bring in the notional goodwill that would have been attributable to the nci to arrive at the overall impairment. Having reached that figure, because the nci has been valued as though they had no goodwill, then share of the impairment cannot be taken to reduce the nci value.
So only our share is reflected in the figures
Thanks, Mike, so the answer of example 3 in chapter 3 is wrong? because it recognizes the goodwill impairment share of NCI. Is it true? I am really frustrated on this point.
Same way the answer did for example 4 of chapter 3, W4 goodwill impairment share (30%x17,000) for NCI is deducted when calculating NCI, but in W4, A in L’s NCI calculation part does not recognize any goodwill impairment. Please help check.
Thank you for your timing,
Qin
One more on example 4, the pre-acquistion value of NCI in K, why I can’t use the share price $1.70 per share for calculating NIC: 500,000 shares x 30% share x 1.7 = 255,000 instead of NA@DOA 750,000 x 30% = 225,000. Because the question says A bought 350,000 shares in K at $1.70 per share.
Thanks,
Qin
I hadn’t thought before of Anda in Liene – I’ll give that some further thought.
In your last post, we are told that the value of the nci is $XXXXX
When a parent acquires a subsidiary, it is invariably the case that the amount paid per share is a premium price (in order to persuade the selling subsidiary shareholders that this is “a good deal”)
The amount paid per share is therefore probably not the same as the underlying asset value per share nor even the present value of that shares future earnings. Sometimes the examiner will say that the nci should be valued on a fair value basis and that the share price can be taken to be fair value.
But other times, the examiner will give you sufficient information for you to be able to calculate the nci value at date of acquisition
Ok?
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Hi Mike, I have the same question as QIN
“Hi Mike,
I reopen this question coz I hope I could find the answer myself to save your time when I practice example 3 from Chapter 3 more complex group structures on page 22. I found the impairment on goodwill is recognized for NCI – W4, NCI in D, goodwill share of impairment: 160, NCI in V, goodwill share of impairment 383.
However, for Trailer – June 2013, the working 3 of impairment of goodwill, the answer says: as the goodwill relating to the NCI is not recognized, no impairment of goodwill is allocated to the NIC.
Could you please have a look? Which instruction I should follow?
Thanks,
Qin”
There seems to be 2 methods to impairment of goodwill when NCI is valued on a proportionate basis.
1. Traveler ( Dec 2011)
After obtaining the full impairment the answer took the group’s proportion of the impairment.however
2. Trailer ( Jun 2013)
After obtaining the full impairment the answer minus the “notional” NCI goodwill and charge the remaining to the parent.Can you please let me know if there is a difference in the treatment? Am I missing something??
URGENT!! exams in 2 days time!!
Hello Tsang, that’s a littke bit tricky, but I’ll try to explain it to you.
First of all, only in the full goodwill method (fair value method) you allocate the goodwill impairement to the Group and to NCI.
1) In case of full goodwill method, you make the following calculations of impairment:
FV of net assets + goodwill in your group accounts – recoverable amount = impairment
This impairment is distributed to RE and NCI proportionally based on interest holding.
2) In case of proportionate method, you make the following calculations of impairment:
FV of net assets + goodwill in your group accounts * 100% / X% – recoverable amount = impairment (gross)
where X% is the group’s share in net assets.
And then: gross impairment * X% = group’s impairment.
Only this group’s impairment is recognised in RE, there’s nothing else to recognise in NCI.Ok, so in Traveler’s case the Group decided to use the full goodwill method only for Data. For Captive the proportionate method was used.
So when you calculate the impairment for both of these companies, in the case of Data you allocate the impairment of 50$ proportionally to group’s RE (80%) and to NCI (20%).
As for Captive, as the proportionate method is used) you do not allocate the impairement to NCI and the whole impairment (61$) is recognised in RE.In case of Trailer, that’s more complicated. Here NCI at acquisition is valued with proportionate method, so the impairment of goodwill will not be allocated to NCI.
So you do the same as in 2) above:
FV of net assets (2.255$) + goodwill (80 * 100%/60%) – recoverable amount (2.088) = gross impairment (300,3)
Now the problem is that this amount exceeds the grossed goodwill (80 * 100/60 = 133.3), so this impairment will be allocated first to grossed goodwill (133,3) and then the remaining amount to PPE (167).
The grossed goodwill is your goodwill in the books (80 = 60% * 133,3) and the potential goodwill recognised by NCI (53,33 = 40% * 133,3). This potential goodwill is not recognised in group’s books – it’s just potential.
So in your books you have the goodwill of 80 and this is what you need to impair to nil. And then you impair the PPE in the amount of 167$ – as there is a loss in the value of PPE, 60% of this loss (100,2) will be held by the group (therefore decreases RE) and 40% of this loss (66,8) will be held by NCI (therefore decreases NCI).That’s really tricky, but I hope that I helped at least a littke bit. The most important is to remember the methods given above in 1) and 2)?
Good luck!
I will give you still one example:
let’s say in case of Trailer, the recoverable amount was not 2.088, but 2.288,3. Then we would have:
FV of net assets (2.255) + grossed goodwill (80 * 100/60 = 133,3) – recoverable amount (2.288,3) = gross impairment (100)
Now this gross impairment considers both the group and NCI, so the imparment to be recognised by the group would be 100*60% = 60.
So after impairment your new value of the goodwill would be 80-60=20.
As this is a proportionate method, you recognise only the group’s impairment, so you decrease goodwill and RE. There’s nothing to recognise in NCI!
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